As the Kazakhstan banking sector enters a period of heightened competition, the country's three biggest banks have each chosen different ways of responding. Julian Evans reports.
It used to be the case that if you needed to know one thing about the Kazakh banking sector, it was that there were the big three, and then there was everyone else. The big three meant Halyk Bank, Bank TuranAlem and Kazkommertsbank. Together, they accounted for 62% of the sector's total assets in each of the last three years.
It was also received wisdom that the most profitable sector of Kazakh banking was corporate lending, so the most successful Kazakh bank was the bank with the strongest corporate lending business – Kazkommertsbank.
However, all this could be about to change. "The margins on large corporate loans are declining," says Grigori Marchenko, former governor of the Kazakh National Bank, and now CEO of Halyk Bank. "Corporates are becoming increasingly choosy, and they increasingly have access to international capital markets."
This has affected all banks, though none more so than Kazkommertsbank. "Growth in our core business has been slowing down," says Andrei Timchenko, managing director at the bank. "Five years ago, spreads on a large corporate loan would be between 6% and 8%. Now it's down to around 3.5%.
"The money," he adds, "is increasingly being made in SME [small and medium enterprises] and consumer lending."
These sectors are driving growth in the banking sector, assets in which are growing at around 40% year-on-year. And in these areas, banks outside the big three have been performing well.
"The consumer loans and mortgage sectors are very competitive, because medium sized banks have a competitive edge over their bigger rivals. They're more nimble," says Anvar Saidenov, governor of the National Bank of Kazakhstan.
Banks like Alliance Bank, ATF, Caspian Bank and CenterCredit have been growing very quickly in SME, mortgage and consumer loans.
"We're very strong in the retail sector," says CenterCredit's head of international business, Timur Ishmuratov. "Around 26% of our total loan portfolio is retail loans. Margins there have stayed steady at around 8%."
CenterCredit's retail deposits grew by 122% in 2004, compared to Kazkommertsbank's retail deposit growth of 20.7% in the same period. And CenterCredit's net income more than doubled from $8.9m in 2003 to $19m in 2004, and its total assets passed the $1bn mark at the beginning of the year.
Bank Caspian's growth has been similarly strong in consumer lending, says Vladimir Shelemba, head of financial institutions at the bank. "We've positioned ourselves as the leading bank in consumer lending, partly through our express lending systems," he explains. "We're issuing over 1,500 new consumer loans daily."
The bank has set itself the aim of being the number one Kazakh retail bank, though it has a long way to go if it wants to rival Halyk Bank's retail network.
Alliance Bank, meanwhile, has achieved the distinction of being the fastest growing bank in the entire CIS. Its assets grew by over 200% last year, taking it past the $1bn mark this year. It has been aggressive in seeking business in corporate loans, and is also a market leader in mortgages.
These top 10 banks have been helped in their rate of growth by their access to the international bond markets, something they have only achieved this year (see Eurobonds article on page 7).
Lagging the market
When asked what the big three banks think of this rapid growth by their smaller competitors, Timchenko from Kazkommertsbank strikes a note of humility.
"The change in the market has been happening where the biggest banks have been slowest," he admits. "We could have gained a lot more market share in the SME sector. Mid-size and smaller banks have been growing their SME businesses much faster than we have."
However, he points out that Kazkommertsbank has managed to carve out a leading position in the lucrative mortgage market, where it has a 30% market share.
Marchenko at Halyk Bank is more laconic. "Smaller banks are growing very fast. In some cases, they're offering their services for free," he says. "But at the end of the day, what is important is whether they're profitable. Our strategy is not to be the fastest growing bank, or the largest, but the most profitable.'
Halyk, of course, is in a good position to capitalise on the growth of retail and consumer banking. It has by far the largest branch network in the country, with 538 branches. Halyk also claims to be the leader in mortgage lending and Marchenko says the market is straightforward: "We issue 10 year bonds to pension funds, then sell 10 year mortgages. It's pretty good margins."
The bank will steer clear, however, of consumer lending for the time being. "Medium sized banks have been very aggressive in this area," Marchenko says. "But a proper credit scoring system hasn't been finalised yet. Some banks could run into problems here. We think mortgages are safer."
Ishmuratov at CenterCredit sees things the other way round. "We feel more comfortable with consumer loans, while we're monitoring the mortgage market very carefully in case there's a bubble there," he says.
The National Bank governor, Anvar Saidenov, echoes Ishmuratov's concerns. "There is a concern about whether the growth in mortgages poses a risk to the financial system," he says. "The exposure of the sector to mortgages and to construction companies is rather high. There's a risk of a bubble in housing prices, because property could already be over-priced."
Saidenov says prices are fuelled by the fact that Kazakhstan's growing middle class are increasingly investing in the property market, buying several properties.
To try and protect banks from real estate exposure, the National Bank recently introduced a new requirement that banks had to set aside extra capital if mortgages accounted for over 30% of their loan portfolio.
That was one of several new laws the National Bank and the financial regulator, the FSA, have introduced in an attempt to slow down the lending boom in mortgage, SME and consumer finance.
"Growth at such a rate is inevitably accompanied by deterioration of the loan portfolio," Saidenov says. "NPLs [non-performing loans] account for 3% of all loans this year, up from 2% in 2004."
Capital adequacy ratios for Kazakh banks are already higher than Basel requirements, and they look like they will get higher still. Thus the main restriction on banks' future growth could be a lack of equity. All the largest Kazakh banks are looking at ways round this conundrum. Looking at the three biggest banks, they are adopting three very different strategies for future growth.
Looking abroad for help
Halyk Bank has decided to look for a strategic foreign partner. "We assume at least two foreign banks will enter the SME and retail market," Marchenko says. "These will be the first new arrivals in this market for eight years. That's why we're looking for a foreign partner. It's not about competing with the usual lot."
Halyk is talking to three European banks, two of them French. A strategic foreign partnership, he says, would give the bank access to better equity, cheaper borrowing, and importantly, would help the bank improve its IT and risk management systems, putting it in a safer position to enter markets like consumer finance.
Kazkommertsbank, by contrast, wants to try and go it alone. It is looking at two different ways to raise equity on the international markets — either through an IPO of around 35% of its equity, or through a perpetual bond issue.
Timchenko says the latter option looks more likely in the short term. "It would be cheaper for us than issuing pure equity," he says. "But existing legislation doesn't allow us to qualify it as tier one equity, so we are in discussions with the regulators to try and change that."
The $100m perpetual bond they are considering would cover their capital needs for a year, after which time the bank could issue between $150m and $250m in pure equity, Timchenko says.
Bank TuranAlem, meanwhile, says it is focusing on overseas expansion. "Bank TuranAlem's market share in most Kazakh markets is already 25% to 30%," says chairman Saduakas Mameshtegi. "We believe sooner or later there would be problems with the anti-monopoly regulator, so we can't grow any more. Thus we're looking to build up a pan-CIS bank."
In the last 12 months, Bank TuranAlem has bought four small banks in different regions in Russia — small banks in Azerbaijan, Belarus and Tajikistan, and a mid-size bank in Ukraine. It is looking to expand these banks first into leading cross-border trade financiers, and then into universal banks, selling the same portfolio of products throughout the CIS.
Mameshtegi says Bank TuranAlem wants to be the biggest private bank in the CIS within five years. It is also still hopeful of a partnership with its minority shareholder, Raiffeisen International.
"The questions is what price", says Mameshtegi.
Bank TuranAlem's nearest rivals are sceptical of its CIS ambitions and Timchenko at Kazkommertsbank says the expansion could be too fast. "It took us a year and a half just to open our Moscow subsidiary, and we were very fast," he says. "I don't think Bank TuranAlem is making a sufficient investment in infrastructure."
Marchenko declares: "There is no pan-CIS banking market. There's barely even a pan-Russian banking market."
It is thus a time of diverging paths in the Kazakh banking market. Smaller banks, able finally to access international capital in size, are making bold bids for leadership. Bigger banks are wondering whether to stay independent and domestically focused, whether to join up with foreign banks, or whether to expand on their own into the CIS. Whoever decides correctly, it is certain it will be a very different market in a year's time. l